A surprisingly resilient report on US retail sales drove Wall Street stocks higher on Wednesday, dragged credit spreads down from record wide levels and sent the dollar to its highest level against the yen for a month.
However, the initially positive response from the markets on Tuesday to billionaire investor Warren Buffett's offer to take over $800bn of municipal bonds guaranteed by ailing bond insurers, quickly faded.
Independent Strategy pointed out that if Mr Buffett took over the muni part of the bond insurers' business, the monolines, as they are known, would be left with just the toxic assets in structured finance, where their capital is being destroyed.
"Monolines are still facing huge losses on structured finance downgrades," Independent said, "and counterparty failure risk in the credit derivatives markets remains."
But equities got a boost from data showing that US retail sales rose by 0.3 per cent last month, against expectations for a 0.3 per cent decline. Core sales, which exclude cars, also increased by 0.3 per cent.
Paul Ashton, senior US economist at Capital Economics, said the figures supported the view that the US economy was basically stagnant rather than plummeting spectacularly into recession.
"Aside from autos and gasoline, sales have been particularly weak for two months now, but that reflects the temporary effect of the recent jump in energy prices as much as it does the effects of the housing downturn," he said. "With energy prices now stabilising, consumers will be facing one less headwind over the coming months."
However, others were more sceptical, particularly given that car sales rose by 0.6 per cent in January - a stark contrast to the 6.3 per cent drop in unit sales already reported by the vehicle manufacturers.
Rob Carnell, economist at ING Financial Markets, said: "There are too many other indicators pointing in the opposite direction for the rise in retail sales in January to be accepted at face value, and we would expect some of this month's discrepancy to be unwound in the February report."
But the response to the retail sales data from equity markets was positive. By midday in New York, the Dow Jones Industrial Average was up 0.8 per cent, the S&P 500 was 0.7 per cent higher and the Nasdaq Composite was up 1.3 per cent.
The pan-European FTSE Eurofirst 300 pared an early 1.3 per cent decline to end flat.
Asian stock markets achieved moderate gains, with the Nikkei 225 Average in Tokyo rising 0.4 per cent, Hong Kong 1.1 per cent and Mumbai 2.1 per cent.
Credit markets had another volatile session. The Markit iTraxx Crossover index of 50, mainly "junk-rated", credits - a widely-watched barometer of risk appetite - briefly widened to 575 basis points before narrowing to 543bp - down 9bp on the day.
The investment grade iTraxx Europe index widened above 110bp before easing back to 102bp - 1bp tighter on the day. It was the first session since February 1 that the index tightened over the day.
Government bonds were mixed following early falls after the US retail sales figures. The yield on the 10-year US Treasury was up 1bp at 3.67 per cent although the two-year yield was 3bp lower at 1.88 per cent. In Europe, the 10-year Bund yield rose 3bp to 3.95 per cent.
On the currency markets, the dollar rose to Y108.20 and also gained ground against the euro and the Swiss franc following the US data.
However, analysts cautioned that the rally was likely to run out of steam ahead of testimony by Federal Reserve Chairman Bernanke before the Senate banking Committee on Thursday.
Sterling got some support from a relatively hawkish quarterly inflation report from the Bank of England, which supported the view UK interest rates will be lowered at a moderate pace.
The Swedish krona gained ground after the Riksbank unexpectedly raised interest rates by a quarter point.
In commodities, oil prices rose after weekly US data showed a smaller than expected increase in crude inventories. March West Texas Intermediate was up 40 cents at $93.18 a barrel. Platinum maintained its record-breaking run, hitting a new peak of $1,970 an ounce, while gold held above the $900 an ounce level.
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